Critics and Advocates Debate Federal Payday Loan Policy

EPF May 2, 2019

As a subcommittee of the U.S. House Financial Services Committee, the Consumer Protections and Financial Institutions Committee met Tuesday in Washington to discuss the CFPB’s decision to rescind 2017 regulations that were designed to eliminate debt traps caused by payday and car title loans.

Speaking to Congressional leaders – pastors, activists, professors and executives took to the floor to voice their opinion regarding the proposed changes.

Here are some of the highlights:

Reverend Fredrick Douglass Haynes III – Senior Pastor:

“As pastor of Friendship West Baptist Church in Dallas, Texas, I have heard too many share their experience of being exploited and ensnared in the payday debt trap. One of my members, a 74 year old senior citizen, who is feisty and fiercely independent, discovered she didn’t have the money to pay a bill. She saw a commercial for a payday loan and felt it was an answer to prayer. Now she feels like the devil answered her prayer. She is on a fixed income and when the repayment was due, she didn’t have enough and had to take out another loan to pay the first one. She ended up with a dozen loans. When she approached me for help one Sunday after church, this once proud senior saint with good credit, was ashamed and tearful. She showed me the paperwork. I was appalled. The interest rate was 620%! She was ‘dealt a bad hand with a bad plan.’ She was hurting for help. She took the bait of the payday loan and became trapped in debt that made her bad situation so much worse.

“It’s time for a new plan for those who have been dealt a bad hand. The 2017 CFPB ‘Rule’ is a plan that simply requires that before payday and car title lenders make certain loans, they assess whether potential customers can afford to pay them back with the finance charges, given the customers’ income and other expenses. This is a commonsense foundation of responsible lending. The rule is a good plan that protects many of our nation’s families from the worst impacts of triple-digit interest debt traps set by payday and car title lenders. A coalition of citizens committed to protecting consumers has mobilized to push for strong reforms of predatory practices. Included in this coalition of conscience are those personally impacted by debt trap practices, advocates for low-income families, veterans, the elderly, responsible businesses and faith based groups. We are appalled that the CFPB would propose ripping out the heart of the rule in favor of allowing payday lenders to continue to exploit those who are struggling and vulnerable.”

Kenneth Whittaker – Activist and Former Payday Loan Consumer:

“Years ago, I was working in IT for the University of Michigan, when I withdrew the money from my paycheck and proceeded to lose the cash out of my pocket, which I noticed when I was buying a hot dog for my son. Unfortunately, I took out a payday loan of about $700. That turned out to be a very big mistake that truly altered the course of my life. I found I could not afford to pay off the first loan without taking out another one. Thus, began a cycle of debt, which lasted over a year. Soon I was paying $600 per month in fees and interest. I eventually closed my bank account to stop payments from being drawn out and leaving me without cash for my family’s rent, groceries and other essential bills. This led to debt collections and a judgment. My tax refund was garnished, making things that much more difficult for my family. All told, that $700 loan ended up costing me $7,000.

“I spoke out about my experience at the time and the Consumer Financial Protection Bureau was developing the rule that would require lenders to make loans based on their customers’ ability to afford and repay them. To me, that requirement only makes sense, and it’s how all lending should be done. Having been through the experience myself, I know how devastating payday lending can be. It is quite disturbing to me that the current leadership of the CFPB is threatening to repeal that rule. I strongly support keeping the 2017 CFPB rule. I also support the proposal to cap annual interest rates at 36% to stop predatory lenders from trapping customers in high-cost loans that can ruin their financial lives.”

Diane Standaert – Director of State Policy at the Center for Responsible Learning:

“Payday lenders and their supporters deflect regulatory attention away from the lenders’ inherently destructive business model by pointing to competition and other alternatives. Data shows that neither will interrupt the debt trap of unaffordable, high cost loans. In support of its gutting of the 2017 payday loan rule, the CFPB under Director Kathy Kraninger suggests that substantive protections to ensure loans are affordable are not needed if additional products by banks and others also exist in the marketplace. There is no evidence to support this claim. In fact, the evidence points to the contrary –that additional high-cost, poorly underwritten products push borrowers deeper into unsustainable debt, rather than substitute or drive down the cost of even higher-cost products.

“The 2017 rule aimed at stopping the debt trap of these loans established common sense principals of ensuring that these lenders assess a borrower’s ability to repay the loan in light of their income and expenses. Rather than do the necessary work to prepare for compliance of this rule by its August 2019 effective date, the lenders have sought to block the rule in every way possible — through Congress, through the courts, and now through the CFPB itself. Both the delay and the repeal of the rule will allow payday and car title lenders’ debt trap business model to continue as usual and leave millions of people across our country burdened with the unavoidable harms of this crushing debt. Allowing the 2017 rule to go into effect as planned is the bare minimum that the CFPB should do. It is absurd that we should even have to make such a straightforward request of an agency whose charge is to protect consumers from unfair, deceptive, and abusive financial practices.”

“Liberty often works to help our customers get out of these predatory loans and into more manageable products. This dynamic is one of many reasons why we have created our own small-dollar product – the Freedom Fast Loan. The Freedom Fast Loan was created in 2008 in part because we saw demand for responsible, small-dollar credit in the markets we serve and very few competitors to payday and auto title loans. We also encountered Liberty customers who may have gotten a payday or title loan, and we created a product that would refinance them into a lower-interest product. Our customers use Freedom Fast Loans for everything from funeral expenses to consolidation loans for other high-interest debt like credit cards or payday loans. The average loans is for just over $6,000, and the average interest rate is 12.6%. Our APR never exceeds 34.3%, and we serve customers with credit ranging from the lower 500s to over 700. We also report payments to the credit bureaus, so our customers can also build their credit while using our product.

“Our Freedom Fast Loans meet the credit needs of the communities we serve. In order to scale or product and for community banks to provide similar products, however, we believe that there are steps that federal banking regulators and Congress must take in order to facilitate the kind of robust marketplace where community banks can compete with predatory, small-dollar lenders.”

Christopher Lewis Peterson – Professor of Law, University of Utah and Director of Financial Services, Consumer Federation of America:

“The CFPB’s law enforcement work also revealed that high cost creditors are aware of these patterns and intentionally design their business models to keep low-and moderate-income consumers trapped in debt. For example, one of the largest payday lending industry chains in the country included the following diagram in the manual it used to train its employees. In its ‘loan process’ the business intentionally loaned money at triple digit interest rates to applicants knowing that the customer would ‘exhaust the cash’ and ‘not have the ability to pay.’ In ‘The Loan Process,’ the customer then enters collections and ultimately borrowers starting the cycle all over again. For many borrowers, this cycle begins anew after the borrower has already repaid nearly as much in fees and interest as they originally borrowed. And, for borrowers in the most dire financial straits, renewal loans are also often for larger amounts than the loans they replace leaving borrowers deeper in debt than when they started.

“A borrower, whose name I have changed for her privacy, works as a receptionist for $11.00 per hour in Albuquerque, NM and is a proud, enrolled member of the Navajo Nation. When her partner did not receive as many hours at his place of employment, the couple fell behind on their bills. Ms. Begay took out a $1971.05 vehicle title loan with a 300% APR, secured by her lien on her truck. Over the next eight months, Ms. Begay made $4,635 in payments on her loan. Because she was only making $11.00 per hour, coming up with these payments was extraordinarily difficult for Ms. Begay and represented a daily struggle. Yet despite all her efforts, simply because of the extraordinarily high interest rate, the vehicle title lender only applied $1.16 out of her many payments to the loan’s principal balance. After all of these months, the lender claimed Ms. Begay still owed $2,422.05—more than the original principal of her loan. When Ms. Begay eventually gave up and stopped paying, the lender engaged in harassing debt collection calls including calls to her place of employment because it interfered with her job. For Ms. Begay, and millions of Americans like her, this 300 percent interest rate loan was a debt trap.”

Gary Lacy Reeder II – VP Center for Financial Services Innovation:

“Our research suggests that a variety of different needs and use cases underlie the demand for small-dollar credit and that many of them are symptomatic of one or more dimensions of poor financial health on the part of borrowers. Historically, payday lenders, auto title lenders, pawnshops, and other subprime lenders have dominated the provision of small-dollar loans. Many of the products they have offered are expensive, rarely underwritten, rely on cycles of continuous use, and harsh collection practices that both exploit and perpetuate borrowers’ financial distress. Auto title loans are of particular concern because of the potential loss of a car in the event of default. Understanding the nature of demand for such products should inform how providers can meet that demand responsibly—and the limits to their doing so. Short-term, small-dollar credit products must generate sufficient profit in order for providers to make them available to credit-worthy consumers who need them. The success of responsible products must be measured not simply by whether they meet demand, but by their potential to help users improve their financial health.”

Robert Sherrill – CEO, Imperial Cleaning Systems:

“I’m not sure if I am the only person on this panel who has actually used these products, but I hope that with my testimony I can shed some light on how important they were for me at a time when I had no other options. Payday and title loans helped me when I had nowhere else to turn. I might not be here if these forms of credit were not available to me. I’m not proud of this, but it’s an important part of my experience. When I got out of prison, the deck was stacked against me. I was a felon with no credit, no education, and very little income. I’d ask you to put yourself in a lender’s shoes – would you have made a loan to me? Would you have offered me a lifeline? Would you have given me credit with nothing to prove I was creditworthy but my word?

“When I started my business no one would give me a loan. I know this, because I applied and was rejected several times. Most banks wouldn’t even let me open an account. The only account I could get was with a credit union because I pleaded my case. Because of my history, the only company willing to front me the money I needed was a local payday lender in Nashville called Advance Financial. If Advance Financial had not been an option, I would likely not be here testifying to you today. Itis unfair for anyone to assume that every day people don’t know what they’re getting into or what the repayment terms of a loan are going to be. That assumption is based on the conclusion that ordinary people are uneducated or too unsophisticated to make smart financial decisions. In my situation, I was tracking every dollar I had. I knew when money was coming in, and I knew when it was going out. I knew that I would have to repay the loans that I took out. When I went to Advance Financial, every part of the process was explained clearly and fairly, including when payments were due, how much they would be, and how much it would cost me for the loan. Today, the business that I started with a payday loan is Nashville’s premier construction and commercial cleaning service. I am a minority certified business, belonging to the Chamber of Commerce, the Better Business Bureau, and Nashville’s Rotary Club. Now, I qualify for lines of credit and other types of loans. I have developed a solid business foundation. But it is all because of the lifeline that Advance Financial gave me when no one else would give me the time of day.”

“Payday loans are often one of very few options available to cash-strapped households. 16 percent of payday borrowers use these loans to cover emergency expenses, while 69 percent borrow to pay for recurring items, such as rent and utility bills. Payday loans offer a way to cope with unexpected events and month-to-month income volatility, which affects more than a third of American households with incomes below $50,000.

“While the media often describe payday loans as predatory, the evidence suggests otherwise. Prof. Ronald Mann of Columbia Law School, in a study quoted extensively by the Consumer Financial Protection Bureau, finds that 60 percent of payday borrowers accurately estimate the time it will take them to repay the loan. Payday borrowers are not stupid. They make the best of limited options. As Prof. Lisa Servon of the University of Pennsylvania writes, ‘The question […] is whether expensive credit is better than no credit at all.’ Like Prof. Servon, I worry that placing an interest cap on short-term credit would altogether remove access to emergency funds for the most vulnerable Americans.”

What was the Original 2017 CFPB Ruling?

Back in October of 2017, the CFPB ruled that it’s an “unfair and abusive practice” to make certain types of short term loans “without reasonably determining that consumers have the ability to repay the loan.” The regulation stipulated that all loans must be underwritten and banned certain loans that didn’t meet the requirements.

The regulation also required:

Full-payment tests, where beforehand, the lender needs to determine whether a borrower can afford the loan payments and still meet basic living expenses.

A principal-payoff option that allows borrowers to repay the loan principal instead of having to pay the entire balance – including interest and fees – all at once. This requirement allowed lenders to avoid full-payment tests for loans up to $500.

A debit attempt cut-off where the lender could only debit a borrower’s checking account twice. After this, the lender needs permission from the borrower for any future debits.

The regulations were set to take effect on August 19, 2019.

How Does The U.S. Treasury Department Want To Change It?

In July of 2018, the U.S. Treasury Department urged the CFPB to rescind the 2017 rule. And shortly after Kathy Kraninger was appointed Director of the CFPB, the bureau issued two proposals to rescind the mandatory underwriting requirement and to delay the remaining regulations until November 19, 2020.

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